The evening star pattern is a top reversal signal and it is exactly the opposite of the morning star signal. Like the planet Venice, the evening star foretells that darkness is about to set in, or in other words, it foretells that prices are about to go down. It is formed after an obvious uptrend and it is made by a long white or green body that occurs at the end of an uptrend. This typically occurs when confidence is finally built up. The following day gaps up however the trading range stays small for the day. Again, this is the star of the formation. The third day is a black or red candle day and it represents the fact that the bears have now seized control. That candle should consist of a closing that is at least halfway down the white or green candle of two days prior. The optimal evening star signal should have a gap before and after the star day.
Criteria
- The uptrend has been apparent.
- The body of the first candle is white or green and is continuing the current trend.
- The second candle is an indecision formation.
- The third day shows evidence that the bears have stepped in and this candle should close at least halfway down the white or green candle.
Signal Enhancements
- The longer the white or green candle and the black or red candle, the more forceful the reversal is.
- The more indecision that the star day illustrates, the better the probability that a reversal will occur.
- A gap between the first day and the second day adds to the probability that a reversal is occurring.
- A gap before and after the star day is even more desirable. The magnitude in which the third day comes down into the white or green candle of the first day indicates the strength of the reversal.
Pattern Psychology
A strong uptrend has been in effect and the buyers can’t imagine anything will go wrong so they begin to pile up. However, it has now reached a point in the prices where sellers start to take profits and think the price is fairly valued. The next day all of the buying is met with selling which causes for a small trading range. The bulls then get concerned and the bears start to take over. The third day is a large sell off da and if there is big volume during these days, it shows that the ownership has dramatically changed hands. This change of direction is immediately seen in the color of the bodies.
Please continue to read about the 12 major candlestick patterns.
